Guest Post: Is America On A Burning Platform?

David Walker, the former Comptroller of the United States from 1998
until 2008, has been warning politicians, the media, and the American
public for over a decade that we are off course and headed for disaster.
In August 2007, before the financial system meltdown of 2008, Mr.
Walker declared:

The US government is on a “burning platform” of
unsustainable policies and practices with fiscal deficits, chronic
healthcare underfunding, immigration and overseas military commitments
threatening a crisis if action is not taken soon. There are striking
similarities between America’s current situation and the factors that
brought down Rome, including declining moral values and political
civility at home, an over-confident and over-extended military in
foreign lands and fiscal irresponsibility by the central government. The
fiscal imbalance meant the US was on a path toward an explosion of
debt. With the looming retirement of baby boomers, spiraling healthcare
costs, plummeting savings rates and increasing reliance on foreign
lenders, we face unprecedented fiscal risks. Current US policy on
education, energy, the environment, immigration and Iraq also was on an
unsustainable path. Our very prosperity is placing greater demands on
our physical infrastructure. Billions of dollars will be needed to
modernize everything from highways and airports to water and sewage
systems.

Three years have passed since Mr. Walker sounded the alarm and issued
his dire warning. The National Debt in August 2007 was $8.9 trillion.
Today it stands at $13.6 trillion, a 53% increase in just over 3 years.
It took 205 years as a country to accumulate $4.7 trillion of debt.
We’ve added $4.7 trillion in the last 38 months. It doesn’t appear that
anyone in government heeded Mr. Walker’s warnings.

The perpetually optimistic pundits that occupy the positions of
influence on CNBC and the other MSM networks try to paint a rosy picture
of the American state of affairs day after day. They urge citizens to
spend money they don’t have. They are sure that extending unemployment
benefits to 99 weeks will improve the unemployment situation. They
declare that Cash for Clunkers and the Home Buyer Tax Credit were
successful government programs. They are sure that invading countries in
the Middle East will make America safer. Nobel Prize winners in
economics declare that the government should undertake another $8 to $10
trillion of money printing because the first $5 trillion wasn’t enough.

The Federal Reserve is pulling out all the stops in attempting to
invigorate the American economy. The stock market is surging. Everything
is surging. The optimists are crowing that all is well. Deficits don’t
matter. We can borrow our way to prosperity. Cutting taxes will not add
$4 trillion to the National Debt if not paid for with spending cuts. All
is well. So, the question remains. Was David Walker wrong? Are we
actually on a perfectly sturdy solid platform? Or, are we on the
Deepwater Horizon as it burns and crumbles into the sea? Let’s examine
both storylines and decide which is true.

AMERICA ON A STURDY PLATFORM

The National Debt of $13.6 trillion is manageable because interest rates remain at historic low levels.

The addition of $1.6 trillion in debt per year is necessary because
government must step in for the lack of spending in the private sector.
This will jump start the economy. This is Keynesianism 101.

The debt to GDP ratio of 93% is not dangerous. Japan has a debt to
GDP ratio of 200% and they are doing fine. This proves we have plenty of
room to grow our debt.

The US dollar is the reserve currency for the entire world. We can
systematically devalue the USD, which will reduce our foreign debt
burden over time. The foreigners who leant us the money are on the hook
and they have no way out.

A depreciating dollar will help our manufacturing industry by making American exports cheaper in foreign markets.

The $700 billion TARP plan saved the American financial system. The
American taxpayer will end up making a profit in the long run from this
program.

Cash for Clunkers was an astounding success. It increased demand for autos dramatically.

The Homebuyer Tax Credits resulted in a surge in home sales and stabilization of home prices.

The $800 billion Stimulus plan saved America from a 2nd Great Depression. Without it, we would have lost millions of jobs.

Consumer spending accounting for 70% of GDP is sustainable and
desirable. If we can just get credit flowing again and encourage
consumers that it is safe to use their credit cards to spend, the
economy will come roaring back.

This is not the time to save. Nobel Prize winners in economics urge
Americans to spend because of the Paradox of Thrift. It may be smart for
one person to save more than they spend, but if everyone does it a
consumer society will collapse. We can save later is the recommendation.

A QE2 of $8 to $10 trillion would surely increase the animal spirits
of the dejected American people. The stock market would soar to 20,000
and everyone would feel rich. Spending would surge. All would be well
again.

The Social Security Trust Fund is not broke. The money contributed
by Americans over the decades is in a lockbox and the fund will be
solvent for decades. A few tweaks and it will be solvent forever.

Medicare has been one of the best government programs ever
conceived. It has sustained our senior citizens and delivered high
quality care to all at a reasonable cost.

Baby Boomers are rational and realistic. The statistics that show
they have not saved enough to sustain them in retirement is overblown.
Social Security will suffice. If not, they’ll just work a little longer.
No worries.

Obamacare will reduce healthcare costs, improve service, cover more
people, and reduce the profits of insurance companies and drug
companies.

We have the best educational system in the entire world. People from
all over the world want to get into our best Universities. No Child
Left Behind has been a huge success.

We are safer today than we were on September 11, 2001. We won the
Iraq War and freed the Iraqis from the clutches of a madman. We are
fighting them over there so we don’t have to fight them over here. The
terrorists are in disarray and retreat.

The $1.1 trillion spent on the Middle East Wars, the trillions spent
on the Dept of Homeland Security, and the expansion of government
ability to protect its citizens through enhanced surveillance techniques
and enhanced interrogation techniques on suspected terrorists has been
beneficial to the safety and security of the American people.

A Defense budget of $900 billion per year is essential to our national security. We are surrounded by potential enemies.

It is a net positive for the US to allow illegal immigrants to stay
in the country. Who else would we get to work in the fields picking
lettuce and cutting our suburban lawns?

Gasoline is only $2.70 a gallon. We are awash in supplies of oil.
Peak oil is a myth perpetuated by environmental nuts. We have centuries
worth of oil in the Bakken Shale. If we would just open up Alaska to
drilling, our troubles would be gone. Drill, Baby, Drill.

Our crumbling infrastructure is actually a fantastic opportunity. A
2nd Stimulus program to upgrade our infrastructure would create millions
of high paying jobs.

AMERICA ON A BURNING PLATFORM

The National Debt is $13.6 trillion today. Interest expense for
fiscal 2010 totaled $414 billion. Based upon the current spending path
and assuming that the Bush tax cuts are extended, the National Debt will
exceed $20 trillion by 2015. A reasonable expectation of 5% interest
rates would result in annual interest expense of $1 trillion. The entire
budgeted outlays of the US government are $3.5 trillion today.

Deficits exceeding $1 trillion per year are baked into the cake for
the next decade. Non-Defense discretionary spending totals only $700
billion. Defense spending totals $900 billion. The remaining $1.9
trillion is on automatic pilot for Social Security, Medicare, Medicaid,
and other entitlement programs. Politicians declaring they will freeze
discretionary spending are treating you like fools. It will solve
nothing.

Debt as a percentage of GDP will exceed 125% of GDP by 2015. Rogoff & Reinhart in their book This Time is Different point out the dangers once debt surpasses 90% of GDP: The
relationship between government debt and real GDP growth is weak for
debt/GDP ratios below 90% of GDP. Above the threshold of 90%, median
growth rates fall by 1%, and average growth falls considerably more. The chances of bad things happening to a country increase dramatically after the 90% level is surpassed.

Japan began their 20 years of tears with a debt to GDP ratio of 52%
and a National Savings rate of 15%. The Japanese people bought 90% of
the debt that the government issued. Today, the debt to GDP ratio is
200% and the National Savings rate is 2%. The US entered this crisis
with a debt to GDP ratio of 80% and a National Savings rate of 1%. We
depend on foreigners to buy more than 50% of our new debt. We do not
control our own destiny.

A depreciating US dollar is already creating inflation in many
assets. Gold, silver, oil, and agricultural commodities are increasing
in price faster than the stock market. The policy of the US government
and Federal Reserve of devaluing the currency is being matched by
similar efforts in countries across the globe. The result is a flood of
liquidity creating bubbles which will pop. The American middle class
will be squeezed harder as their wages stagnate, while their food,
energy, and costs at Wal-Mart go higher.

TARP, the purchase of $1.5 trillion of Mortgage Backed Securities by
the Federal Reserve, 0% interest rates, and accounting rule changes by
the FASB have done nothing but paper over the fact that the biggest
financial institutions in the US are insolvent. The assets on their
books are worth 50% less than they are reporting. They are zombie banks.
Their losses on residential real estate, commercial real estate and
consumer credit continue to grow. The only beneficiaries of keeping
zombie banks alive are the bankers who are receiving billions in
compensation while the middle class dies a slow painful death.

Cash For Clunkers, Home Buyer Tax Credit and energy efficiency
credits did nothing but shift demand forward and cost the American
taxpayer $25 billion. The estimated cost to the tax payer per
incremental home sold was $100,000. Auto sales and home sales plunged as
soon as the credits ran out. Home prices are falling and used car
prices have soared due to less supply, hurting the poor.

The borrowing of $800 billion from the Chinese to dole out to unions
and political hacks all over the country has been a complete disaster.
Unemployment has gone up by over 4 million since the stimulus was
passed. Government spending has crowded out private spending.
The economy hasn’t recovered because it was never allowed to bottom. Why
look for a job when the government pays you for two years to watch
Oprah in a house where you haven’t made a mortgage payment in 18 months?

Consumers’ spending money they don’t have, saving less than 5% of
their disposable income, and putting away nothing for their retirement
is unsustainable. The average credit card debt per household is about
$15,700. In 1968, consumers’ total credit debt was $8 billion (in
current dollars). Now the total exceeds $880 billion. Americans
currently owe $917 billion on revolving credit lines and $80 billion of
it is past due, according to the latest Federal Reserve statistics.

A scaling back of consumer spending to a sustainable 64% of GDP
would reduce consumer spending by $500 billion per year. This would
allow Americans to save and invest in the country. This is considered
crazy talk in the Keynesian economic circles.

The anticipation of QE2 has already made the dollar drop 10% and
gold, silver and oil jump 10%. Ben Bernanke and the Federal Reserve are
conducting an experiment on the American people. What they are doing
today has never been attempted in human history. It boils down to
whether the authorities can cure a disease brought on by too much debt
by doubling and tripling the dosage of debt. If this experiment fails,
the dollar collapse and possible hyperinflation would lead to anarchy.
Ben is confident it might work. Are you?

Social Security and Medicare have an unfunded liability exceeding
$100 trillion. There is no money in a lockbox. Congress opened the
lockbox and spent the money. Baby boomers are turning 50 years old at a
rate of 10,000 per day. There is no possibility that the promises made
to Americans by politicians can be honored. No politician of either
party will tell the truth to the American public. A massive reduction in
benefits or a massive increase in taxes would be required to deliver on
this promise.

The 2,000 page Obamacare bill that no one in Congress read was sold
to the American people as a cost saving, care enhancing package of
goodies. The reality is that it will increase the national debt by
hundreds of billions, ration care, drive more doctors into retirement,
strangle small business with onerous regulations and enrich the
insurance companies and drug companies. The unintended consequences will
be devastating.

Total military expenditures for the entire world are $1.9 trillion
annually. The US accounts for $900 billion of this expenditure. This is 7
times as much as the next largest spender – China.

The wars of choice in the Middle East since 2001 have cost unborn
generations of Americans $1.1 trillion so far, with a final cost likely
reaching $3 trillion. Just like Donald Rumsfeld estimated. Over 5,700
Americans have lost their lives and another 39,000 have been wounded.
The casualties in the countries that have been invaded number in the
hundreds of thousands. Are we better off than we were on September 10,
2001?

Defense spending in 2000 was $359 billion or 3.6% of GDP. Today it
is $900 billion or 6.1% of GDP. Every dime of these expenditures is
borrowed. Are we safer today?

The Department of Energy was created in 1979 in order to create an
energy policy that would reduce our dependence on foreign oil. The
United States, which makes up 4% of the world’s population, consumes 25%
of the world’s oil on a daily basis. In 1970 we imported 24% of our
oil. Today we import 70% of our oil.

Over 50% of our oil imports come from countries whose populations
hate the US. Mexico, which accounts for 9% of our current oil supply,
will become a net importer by 2015.

The US has not built a new nuclear power plant or oil refinery since 1980.

The existing energy infrastructure is rusting away. 80% to 90% of
the system must be rebuilt. The cost of rebuilding the infrastructure
will be $50 – $100 trillion. We have no blueprints, few supplies and
fewer trained engineers and construction workers.

Peak oil is a fact. World liquid oil production peaked at 86 million
barrels per day in 2006. It has not reached that level since, even when
prices soared to $145 per barrel. Demand will move relentlessly upward
as China and India and the rest of the developing world march forward.

The US Military has concluded in a report put out a few months ago
that by 2012, surplus oil production capacity could entirely disappear,
and as early as 2015, the shortfall in output could reach nearly 10 MBD.
A severe energy crunch is inevitable without a massive expansion of
production and refining capacity. While it is difficult to predict
precisely what economic, political, and strategic effects such a
shortfall might produce, it surely would reduce the prospects for growth
in both the developing and developed worlds.

THE SHIP OF STATE

David Walker was in a ship well ahead of the US Titanic crossing the
Atlantic. He saw the dangerous icebergs floating in the ocean. He sent a
message to the Captains (Bush, Obama) and Executive Officers
(Greenspan, Bernanke, Paulson, Geithner) of the US Titianic that there
was danger ahead. They should have reduced speed and doubled the
lookouts. Instead they listened to the Managing Director of the cruise
line (Wall Street) and increased speed. The US Titanic was unsinkable.
When the inevitable collision with the iceberg occurred, those in
command chose to disbelieve the possibility that the mighty ship could
sink. The nearest ship was four hours away. If the US Titanic had
stopped immediately after striking the iceberg, it would have remained
afloat until the rescue ship arrived. Instead, the masters of the
ship chose to keep going as the compartments below the surface continued
to fill with water. Reputation and hubris drove them to take these
actions.

Those in command knew that there was only room on the lifeboats for
1,100 people. There were 2,200 people onboard. It is interesting to note
that 60% of the First Class (the ruling elite) passengers survived the
sinking, while less than 25% of the Third Class (working middle class)
and crew survived.

David Walker has presented a case for inter-generational sacrifice.
Are today’s generations willing to keep robbing future generations of
Americans by being fiscally irresponsible today? Every borrowed dollar
spent today is a tax on future generations. Are we selfish enough to
leave our children and grandchildren with an un-payable burden so that
we can live well today? Don’t the Wall Street bankers and Washington
politicians have children and grandchildren? It is immoral and
despicable that American leaders and its citizens aren’t willing or able
to make the tough choices needed to save the ship of state. Every great
empire withered away due to the accumulation of bad decisions. Ask
yourself whether this country has made the right choices in the last 30
years. Are we making the right choices today? If you are honest, the
answer is NO. We’ve hit the iceberg. The ending is unavoidable.

Sing us a song of the century
That’s louder than bombs and eternity
The era of static and contraband
That’s leading us into the promised land
Tell us a story that’s by candlelight
Waging a war and losing the fight

They’re playing the song of the century
of panic and promise and prosperity
Tell me a story into that goodnight